I know what their intention is when they try to use them, to hedge against some of the following risks; commodity prices, currency fluctuations, interest rate changes, etc. However, after reading another 10K on a company I am researching, making that a total of at least 30 since I have started doing serious research into the stocks I buy. I have come to the conclusion that they are using derivatives because they feel they are supposed to use them, and/or arrogance that they are smart enough to use them, not because they are good at it and it saves them money.
The best case of using derivatives I have seen was a gain of $50 million for the year, not bad. Too bad almost all of the rest of the companies I have researched have either had small gains or lost hundreds of millions of dollars with the use of their derivatives.
Even worse than the lost money is the amount of money that is “locked” into derivatives contracts which is held for the duration of the contract until payment. In a lot of cases I have seen hundreds of millions or even billions of dollars that is essentially just sitting there, that could have been better used in their operations, paying down debt, paying a dividend, or buying back stock, etc.
For example another one of Dole’s current problems is their horrible use of derivatives. In their last 10K they reported a $20 million dollar loss on long term Japanese Yen hedges. http://media.corporate-ir.net/Media_Files/IROL/23/231558/2011DoleAR/docs/Dole-Food-Company-Inc-2011-Form-10-K-As-Filed.pdf They have a total of almost $200 million more in long term Japanese Yen derivative contracts. Couldn’t that have been put to better use paying down debt or improving their operations? In my opinion an emphatic yes.
Corporate management; what happened to keeping things simple, concentrating on improving your core businesses, not worrying that other companies are hedging so you should too, and being a good steward of the shareholders and debtors money?
Keep It Simple Stupid, and do what you are good at.